Quid Report, Volume 68 4 July 2016 QUID REPORT · 2016-07-05 · OUTLOOK FOR THE WEEK: The bearish...

Quid Report, Volume 68 4 July 2016

© Copyright 2015-2016 FM Capital Group LLC. All rights reserved. 1

QUID REPORT A comprehensive report on major GBP currency pairs One week after the citizens of Great Britain (UK) voted themselves right out of the European Union, the world remains. Not only does the world remain standing, the equity markets have reached their previous highs. In fact, the FTSE 100 has recovered all of its Brexit losses while the S&P 500 flirts with new highs. Sterling price action remains dominated by the implications of the Brexit vote. The political risks persist for sterling into the new trading week. Feeling very inundated by the work that has to be done to leave the EU, the UK wants to negotiate its departure from the EU before it decides to actually do so. The referendum vote doesn’t automatically eject Great Britain from the EU. No, the UK wants its cake and to eat it too. They do not want to formally exit until they fully understand the magnitude and severity of the issue at hand. While this may makes sense, the EU has refused to start negoations until the UK has declared their exit official. The politicking stands to undermine sterling even more than the actual vote has. As a result, sterling is overwhelmingly weak across the board.

Volatility continues to roil the forex markets. While the uncertainty in the markets continues to fuel volatility, the strong bear trends in sterling have generally continued to new lows. After three weeks of strength and a surprise Leave vote on the referendum, sterling weakness returned as the market prices in Brexit implications. As a result of the Brexit vote, the Bank of England (BoE) is effectively dovish. There have even been whispers of the BoE introducing negative interest rates in response to a Brexit. Last week, BoE Governor Mark Carney reassured markets that the central bank stands ready to support markets and the economy. Interest rate cuts and more quantitative easing are effectively back on the table for the BoE to consider. The BoE is expected to maintain its dovish stance, which the market perceives as very supportive of financial markets. Coupled with Carney’s statement, equities rallied last week upon realization that Article 50 may not be invoked right away.

“Therefore, signals of strength in pound sterling should be taken as the beginning of a relief rally. The strength of such a rally will depend on the currency pair.”



The new trading week is fairly busy with economic data out of the UK. The event risk of the week for the pound sterling is the release of the services and construction PMI reports. Despite extreme selling momentum in sterling, the market may not collapse further on weak data points this week out of the UK. The manufacturing PMI number was stronger-than-expected, however, that number reflected a pre-Brexit economy. Also notable is that sterling did not rally uniformly, nor sustainably, after the release. This speaks to some exhaustion in sterling markets. Sterling weakness is expected to begin exhausting this week. The large bear trend in sterling has already moved the major GBP currency pairs to new multi-year lows across the board in the aftermath of the Brexit. In many of the currency pairs, the momentum has not supported the new lows in sterling. Therefore, signals of strength in pound sterling should be taken as the beginning of a relief rally. The strength of such a rally will depend on the currency pair.



EUR/GBP

Resistance Friday Close Support

0.8600 0.8350

0.8561 0.8310

0.8500 0.8389 0.8250

0.8430 0.8160

0.8400 0.8126

The break above the zone of resistance between the 0.7860 and 0.7940-levels back in March sparked a larger reversal higher to the 0.8500-resistance level. Now, thanks to Brexit, this very early reversal signal will finally play out. Our long-time call for 0.8500 now looks to be too conservative. The fundamental edge is in place to take this reversal right back to the highs on the weekly chart at 0.8815. In the long term, the EUR/GBP moves much higher from current levels to target the 0.8800-resistance level.



The economic calendar is busy out of the Eurozone this week. The event risk of the week for the euro will be the speech delivered by the European Central Bank Governor Mario Draghi. This will be Draghi’s first post-Brexit speech. Because the euro continues to rally against the pound sterling, markets will be listening for details as to how the European Central Bank (ECB) will support financial markets. Before the Brexit occurrence, the ECB was done implementing new monetary easing measures. This was cheered by markets with Brexit reactions only exacerbating euro strength and buying flows. Therefore, markets will be keen to hear directly from Draghi about the implications of the Brexit on the Eurozone going forward.

OUTLOOK FOR THE WEEK: The bearish divergences on both the large and small timeframes give caution to EUR/GBP sellers this week. As such, the EUR/GBP may finally find resistance on this latest bullish wave at the 0.8500-level. Longs established in prior trading sessions may look to take profits on rallies that move price above the 0.8405 highs of last week. Momentum will need to break to new highs on any such rally that may occur this week. If momentum continues to diverge at new highs, sellers may step in at the highs en masse. This will also trigger profit-taking flows as bulls seek to cover Brexit positions established in the past two weeks. A key level for bulls in this new trading week is the 0.8300-support level. There is confluence at this support level with the 50% Fibonacci level of last week’s rally. If already long, remain long and watch the 0.8300-level on dips. Cover long positions on a rally back to the 0.8500-level. Otherwise, buy dips that hold above the



0.8300-support level. Stops may be placed below the 61.8% Fibonacci level at 0.8282. Bids target 0.8500 in trading this week.



GBP/USD


1.3750 1.3200

1.3680 1.3150

1.3500 1.3245 1.3119

1.3400 1.3000

1.3250 1.2750

The GBP/USD is now trading at levels it hasn’t traded since the 1980’s. Most currency platforms will not have former levels of support or resistance at these levels. Therefore, we must use the prior weeks’ price action as guides. The GBP/USD rallied again last week to the former 1.3500-support level. The GBP/USD found resistance at the 1.3500-support zone. This remains a hugely bearish signal. It would seem that sellers remain in firm control. However, the bullish divergence calls that control into question. The GBP/USD is expected to remain bearish for the long-term but a corrective rally is being signaled. The political risks are such that a Parliamentary decision could spark the GBP/USD higher.



The economic calendar is packed with data releases out of the United States this week. The event risk of the week will be the release of the U.S. non-farm payrolls report. This jobs report will show whether or not last month’s surprisingly weak number was an aberration or the beginning of actual weakness in the U.S. labor market. Another weak number will provide the fundamental impetus to rally the GBP/USD to the new highs that are being signaled by the aforementioned technical developments in the GBP/USD charts.

OUTLOOK FOR THE WEEK: Another bullish signal in the GBP/USD is the failed lows after finding resistance at the 50% Fibonacci level in trading last week. This Fibonacci move should have resulted in a move lower below the 1.3119 lows. Instead, the GBP/USD has found support at the 1.3200-support level and bounced higher to end trading last week. There is also a bullish divergence on the smaller timeframes that is currently in play. This divergence confirms that a bounce off the new lows is entirely possible. A move lower with rising momentum also is the entry signal for buyers. Therefore, sellers now line up at the 61.8% Fibonacci level at 1.3651. However, given the failed lows and the bullish divergence in the GBP/USD, stops must be set tight above 1.3651. Offers target the 1.3000-psychological level. A break above the 61.8% Fibonacci on the four-hour chart sparks the beginning of a rally that has potential to move as high as 1.4293, the 61.8% Fibonacci level on the weekly chart.



GBP/NZD


1.8950 1.8450

1.8858 1.8400

1.8700 1.8463 1.8353

1.8627 1.8270

1.8538 1.8150

The GBP/NZD continued to move to new lows last week. This move lower is also confirmed by the new lows in the RSI on the weekly chart. The GBP/NZD trades well into oversold territory on the weekly chart. The Fibonacci reversal move on the weekly chart is complete with the GBP/NZD breaking below the 1.9250-support level. The 1.9250-level is important for direction because it supported price for two years before the rally to the 2.5300-level. This break below it is definitively bearish and supports a move to the 1.7707 lows. The Reserve Bank of New Zealand (RBNZ) has been unsuccessful at stemming the strength in the New Zealand dollar all year. Interest rate cuts



and jawboning have not been enough to reverse the strong New Zealand dollar buying flows. At this point, it will take direct intervention from the RBNZ to stem the move lower.

The economic calendar is trivial this week out of New Zealand. The event risk for the New Zealand dollar is the dairy price auctions. Energy prices are bullish despite the recent pullback and volatility. If the dairy price auctions are stronger than expected, the GBP/NZD may continue lower. On a move to new lows, momentum needs to fall also to new lows.

OUTLOOK FOR THE WEEK: There is a bullish divergence developing on the four-hour chart at these new lows. This divergence signals a bounce rally back to the Fibonacci levels over the decline of the past two weeks. A rally back to the 1.9250-level is likely met with sellers. This resistance level has confluence too with the 61.8% Fibonacci level. This bullish divergence signals a rally in the GBP/NZD, which can move momentum out of oversold territory. Sellers line up at the 1.9250-level with stops set above 61.8% Fibonacci level. Offers target the 1.8000-support level. Only a break back above the 1.9250-level invalidates the current bearish bias.



GBP/JPY


140.00 135.00

139.00 134.35

138.50 135.70 133.70

137.80 133.21

136.00 132.50

Our long-time call for the GBP/JPY to move lower and break below the large 61.8% Fibonacci level at 147.02 has been fulfilled in the aftermath of the Brexit vote. This break lower confirms the bear trend as the long-term trend in the GBP/JPY. The break below the 147.02-level signals a Fibonacci reversal move that ultimately targets the lows at 116.82. Additionally, market participants expect the ultra-dovish Bank of Japan (BoJ) to tolerate the USD/JPY exchange rate to the 100.00-level. Now that the USD/JPY trades just 250 pips away from this critical level, it may become more evident that the BoJ is intervening directly in the foreign exchange markets. Trades in the GBP/JPY become



very susceptible to this market risk as the USD/JPY drops further to the 100.00-level. The USD/JPY currently trades around the 102.50-level.

The economic calendar is busy out of Japan this week. The event risk of the week will be the speech delivered by the Bank of Japan Governor Haruhiko Kuroda. This will be the first post-Brexit speech given by Kuroda. The BoJ has already enacted historically dovish monetary policy. Negative interest rates continue to be inconsequential to Japanese yen buying flows. While Kuroda is expected to maintain his dovish stance, without any new calls for more monetary easing measures, the Japanese yen will simply refuse to weaken.

OUTLOOK FOR THE WEEK: The bullish divergence on the four-hour chart gives the GBP/JPY potential to bounce so that momentum can move out of oversold territory on the weekly chart. The small bounce off the 133.33 lows met sellers in the Fibonacci sell zone. However, the move lower last week has, so far, resulted in failed lows. The GBP/JPY finds support at the 136.00-level. The failed lows are another bullish signal for the GBP/JPY. A rally off the failed lows here at the 136.00-support level moves the GBP/JPY towards the 140.00-resistance level. Offers are set above last week’s highs at 139.01 with stops set above the 61.8% Fibonacci level at 139.97. The 61.8% Fibonacci level has confluence with the 140.00-resistance level. Sellers ultimately target the 116.00-support level. In trading this week, sellers target the 132.50-support level.



GBP/AUD


1.8150 1.7600

1.8000 1.7500

1.7930 1.7649 1.7458

1.7750 1.7360

1.7650 1.7214

The GBP/AUD has been biased lower for a continuation of the large Fibonacci move lower (see Volume 58). The Brexit outcome has helped the GBP/AUD break the channel to the downside once again. The breaks below the 1.9000-level and, then, the 1.8000-level are significant. Nevertheless, the move lower has resulted in a bullish divergence on the weekly chart. It is important to note that this is not a pure bullish divergence with price not at all near making new lows on the weekly chart. However, this divergence does signal a potential for the GBP/AUD to bounce off the new lows in the new trading week.



The economic calendar is very busy out of Australia this week. The event risk of the week for the Australian dollar is the Reserve Bank of Australia (RBA) monetary policy announcement. The RBA was a neutral central bank before the Brexit vote reverberated throughout the financial markets. This monetary policy statement will be the first communication from the RBA to markets post-Brexit. Any dovish sentiment is likely to jolt the Australian dollar which as been enjoying major buying flows in the past several months. Any such reaction is likely to send the GBP/AUD rallying back towards the bottom of the channel.

OUTLOOK FOR THE WEEK: The bullish divergence on the four-hour chart continues to develop as the new trading week gets underway. However, the GBP/AUD continues to move to new lows as the new trading week opens. This bullish divergence signals a rally in the GBP/AUD off the new lows. Though a rally will move the GBP/AUD to the Fibonacci levels over last week’s decline, the market has the potential to move higher still to the bottom trendline of the channel. Sellers line up at the bottom trendline of the channel at 1.8200. Stops are set above the 1.8250-resistance level. Offers target the 1.7500-level.



GBP/CAD


1.7530 1.7100

1.7450 1.7040

1.7380 1.7101 1.7000

1.7250 1.6962

1.7142 1.6900

The GBP/CAD has continued to move to new lows as the market opens this new trading week. These new lows remain below the large 61.8% Fibonacci level at 1.7432. This break below the 61.8% Fibonacci level signals a Fibonacci reversal move. This Fibonacci reversal move targets the 1.5244 lows. The developing bullish divergence at these new lows has been invalidated in trading last week. Momentum has moved to new lows on the weekly chart RSI along with the new lows in price. However, as momentum here slips into oversold territory, a correction higher is a possibility in this new trading week.



The economic calendar out of Canada this week is fairly busy relative to last week. The event risk of the week for the Canadian dollar is the release of the Canadian jobs report. A strong jobs report will continue to bolster strength in the Canadian dollar. If the GBP/CAD continues to fall to new lows, momentum must also fall to new lows on the four-hour chart RSI.

OUTLOOK FOR THE WEEK: The GBP/CAD, however, continues to develop a bullish divergence on the four-hour chart. This bullish divergence confirms that the GBP/CAD may be due for a correction higher in trading this week. This bounce may contend with the former highs at the 1.7380-resistance level. There is also confluence at this resistance level with the 61.8% Fibonacci level. Sellers line up just ahead of the 1.7380-level with stops set above the resistance level. Offers target a break below the 1.7000-level.



ENDNOTES

“Angela Merkel 'to oust Jean-Claude Juncker' as Europe splits deepen over Brexit response,” http://www.telegraph.co.uk/news/2016/07/03/angela-merkel-to-oust-jean-claude-juncker-as-europe-splits-deepe/.

“Bulls and Bears Saw Speculative Opportunity in Euros around UK Referendum,” http://www.marctomarket.com/2016/07/bull-and-bears-saw-speculative.html.

Forex Factory, http://www.forexfactory.com/calendar.php.

“If No Article 50 Soon, What are the Fundamental Drivers?,” http://www.marctomarket.com/2016/07/if-no-article-50-soon-what-are.html.

Trading View, http://www.tradingview.com.

FX Risk Disclosure Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. The information contained in this report does not constitute individually tailored investment advice. You, and only you, are responsible for the trades or investment decisions you make. Maximum effort and priority is place on using reliable information. Authors have obtained all market prices, data and other information from sources believed to be reliable although accuracy or completeness cannot be guaranteed. Such information is subject to change without notice. The information contained herein is of the date referenced and the Authors do not undertake an obligation to update such information or any other opinion expressed for that matter. Opinions,



forecasts and strategies are subject to change without notice and the price of any security mentioned may increase or decrease. The Authors may have long and/or short positions on the securities discussed herein. The analysis contained in this report is based on a number of assumptions and changes in such assumptions could produce materially different results. This communication is not intended to forecast or predict future events and past performance is not a guarantee or indication of future results. Please remember that investing in securities and other financial products comprises risk, which could result in the loss of the entire starting capital and beyond depending on the complexity and leverage of the chosen product. No liability whatsoever is accepted for any loss, whether direct, indirect or consequential, that may arise from any use of the information contained in or derived from this report, its contents and/or any service provided/advertised/offer through it. This information is intended for distribution only in those jurisdictions where such distribution is permitted. No refund is available for any service provided.

Quid Report, Volume 68 4 July 2016 QUID REPORT · 2016-07-05 · OUTLOOK FOR THE WEEK: The bearish...

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Transcript of Quid Report, Volume 68 4 July 2016 QUID REPORT · 2016-07-05 · OUTLOOK FOR THE WEEK: The bearish...