Getting Ready for Summer Trading

May 28, 2016

“For those of us climbing to the top of the food chain, there can be no mercy. There is but one rule: hunt or be hunted.”
Francis Underwood (Kevin Spacey), House of Cards, 2013

Price action changes somewhat during summer months and to be honest, previous week already felt like there’s been a slight slowdown in intraday price moves. EURUSD is a perfect example as Wednesday’s range in that pair stayed below forty pips and that already says something about the market conditions. However, I do believe that this was just a one-time thing because there is plenty of stuff happening in the world right now and especially in Europe. In other words, this summer, it is all about the bigger picture and the one, who fails to realize that, may suffer significant losses as a result.

At its peak, refugee crisis really tested the unity of European nations as the number of help seekers from abroad skyrocketed so fast that many governments failed to deal with the situation. Numerous countries like Italy, Greece, and Croatia suddenly found themselves in a very complex environment where tens of thousands of migrants suddenly arrived at their doorsteps asking for a permission to enter the European Union. Unfortunately many “frontline countries” didn’t receive adequate help from European institutions nor other member states and hence tensions between each other started to build up. Today the situation has eased a bit but the problem as whole is still very much alive and chances are that at one point things may escalate again.

Currently EU is negotiating with Turkey to send some of the refugees back to their territory in exchanges for visa liberalization for Turkish nationals and additional financial assistance for Turkey’s refugee population. I don’t want to speculate over the possible outcome of that deal but one thing is quite clear – Europe will not survive another major wave of asylum seekers and some kind of solution (long term) is needed and very quickly.

All those events may prove to be very significant for euro as well because Germany and Ms. Angela Merkel are both in the center of those negotiations. Don’t forget that euro is a political currency and the ongoing refugee crisis hasn’t been overly successful for Ms. Merkel in terms of popularity. Actually any kind of political uncertainty in the European Union will also have an effect on the Euro zone as well and hence euro may suffer (or benefit) from the migrant crisis or any other crisis that needs a political solution, a lot more than we may assume.

Brexit and Greece’s money issues are also closely connected to politics and both need an input from the entire European Union and/or Euro zone. While UK’s departure, if it should happen, is extremely complex and we could speculate on the subject for hours, I do prefer to wait until we have the outcome of the referendum before starting do dig deep into the potential gains & losses the EU and UK may suffer as a result. With Greece, the situation is somewhat simpler and more familiar as in 2015, right about the same time, there were also negotiations between EZ and Greek politicians and if you can remember (you can also check the chart), EURUSD’s intraday moves where quite big because of that throughout the summer.

As you can see when it comes to Europe, “politics” is the keyword for this summer and hence I do believe that it’s unrealistic to hope for a nice and quiet price action for the coming three months in euro related pairs. Usually when political decisions affect the markets then the potential outcome is even more complex to predict than it would be under “normal” conditions. However, the world doesn’t only revolve around Europe.

The Federal Reserve and their future plans regarding the Federal Funds Rate is also something that we should not forget. Several FOMC members have called for numerous rate hikes in this year and on Friday, even Ms. Yellen said in her speech that a rate hike in the coming months may be appropriate. While I remain very skeptical about the whole subject, we shouldn’t underestimate FED’s willingness to go forward with their tightening plans, even if the economic outlook doesn’t necessarily support it. Fortunately we don’t have to wait very long to find out as the next FOMC press conference is already on the 15th on June.

Capital Properties FX
28.05.2016