Update on Euro......Rebound still on the way

Update on Euro......Rebound still on the way

                   I wrote a post (here and here) to explain why Euro is time to rebound but it had been keeping falling after that. It suggests that risk management is critical anytime in your trading life. Catching a falling knife is not my trading style and I am patient to wait a reversal to take a position. In this trade, I cut loss several times with discipline and control the loss. Even though my marketing timing is not perfect, I still have enough capital to make a mistake and follow the trend lastly. Euro formed a double bottom on April and breakthrough short term resistance at 1.10. At this moment, I expect Euro still have room to keep the rebound alive.

          Figure 1: Euro price chart with my call (Red line).

Source: Barchart.com

                 Figure 2: Euro sentiment still is at extremely pessimistic. There still is a room for investor get more optimistic.

Source: SentimentTrader

                 Figure 3: Commercial hedger still accumulate a significant long position on Euro. It means the rebound on Euro still is likely to be on the way.

Source: SentimentTrader

                 Figure 4-6: The latest credit data shows that the fundamental condition in Europe is improving.

Source: Danske Bank

                 Figure 7-8: DAX Index and 10 Year Bund start a correction. More stock and bond investors will close their position on hedge against Euro and it triggers a rebound on Euro. I expect a correlation of DAX and Bund between Euro tend to be negative.

Source: Bloomberg

          All in all, Euro rebound is further to go when sentiment is still at pessimistic and Fundamental factor is improving. In addition, over stretched DAX and Bund start to pullback. It also can fuel the rebound. So stay on the boat.

Financial Crisis and US dollar Pullback

Financial Crisis and US dollar Pullback

 

         I write the post (here and here) to explain the reason why US dollar is time to pullback. Now make some update on this topic. According to history, when financial crisis take place, US dollar tend to get weaker either in bull or bear market. It is because when Fed has a tendency to inject liquidity into market or ease monetary policy for containing the crisis; it leads to weaker US dollar as the largest reserve currency all over the world. You can find this pattern in Figure 1. Given current background, recently parabolic rally of USD may trigger the outflow of capital from emerging market and worsen the current account of some resources focused countries such as Russia and Canada. In addition, some indicators I will go though as follow reveal the risk is building up although SPX still is close to new high. Moreover, US dollar now is overbought, over optimistic and over stretched. Pullback may be immediate due to financial crisis.    

            Figure 1: We can observe in the history that USD gets weaker at the start of financial crisis.

Source: Nordea Markets

            Figure 2: BofA Merrill Lynch Irisk Indicator plunge dramatically recently to make a divergence.

Source: PFS Group

            Figure 3: Bloomberg Financial Condition Index also keep falling since mid 2014.

Source: PFS Group

            Figure 4: Canada and Australia LIBOR-OIS worsen in sudden. (Two countries also is facing the housing and debt bubble)

Source: PFS Group

            Figure 5: Russia CDS hit a new high and International Reserve Asset hit a new low.

Source: PFS Group

             Figure 6: Gold keep to rally regardless of the parabolic rise of USD and no longer follow the plunge of the commodity. Smart money may flow into risk aversion haven and expect Fed may ease monetary policy or at least postpone the rate hike to prevent crisis to spread.

Source: StockCharts.com

              My takeaway is that there are some signals that crisis may be coming soon. Fed is likely to ease to contain the crisis. This action will make USD weaker. However, USD will resume the bull market because the capital flow form other market into US economy after the crisis is contained.

Update on Euro

Update on Euro

            I write a post before that say Euro is time to rebound. Now make some update after ECB meeting. ECB launch a new QE around 60bn bond purchase last week higher than market expectation. Euro immediately tumbles to reflect this policy to fall by around 3%. However, I still persist in my call that Euro rebound is coming soon and this rebound can be over 5%.

             Figure 1: The latest Europe economic dates recently reveal the bottom is hit. Growth differentials start to tighten to promote Euro to rebound.

Source: Nordea Market and Macrobond

             

             Figure 2: According to previous QE, market is close to fully discount expectation.

Source: Nordea Market and Macrobond

            

              Figure 3: Euro is overdone to reflect the US/EMU monetary base.

Source: Nordea Market and Macrobond

              Figure 4: Euro is extremely oversold and 52 week of change of US dollar seemingly to hit a peak. US dollar faces a resistance.

Source: Kimble Charting Solution

              All in all, my call that Euro will have a significant rebound remain unchanged after EMU meeting. Almost all bad news for Euro is released and in addition, extremely pessimistic sentiment, oversold price reaction and improving Europe economy create a opportunity to long Euro to catch a short term trend. 

Watch out! The crowd stands on the one side of a boat----Euro.

Watch out! The crowd stands on the one side of a boat----Euro.                      
            The crowds standing on the one side of a boat cause a tragedy to happen. I see it in Euro speculation. Every day I read more article and news to update my market sense and find almost all analysts, bloggers and even central banker is bearish to Euro recently. Last week, SNB make a nuclear explosion on currency market due to the removal of the peg. SNB expect ECB that will launch a QE to fight deflation this week cause a large capital of inflow to CHF. ECB action will force to them to give up the peg. Most of people overlook there are some data which reveal Europe escape form economic slowdown. Sentiment is one of my indicators to trade and find the opportunity in market. I am now bullish to Euro but wait for some technical signal to catch the rebound such as moving average because catching a falling knife is not my trading style. 

            Figure 1: The latest COT data reveals the short position of Euro from speculators reach at extreme level larger than at Europe sovereign risk in 2010 and Fed launching ending QE in 2012.

Source: Nordea Market and Macrobond

        

            Figure 2: The public opinion towards Euro also hit the extreme pessimistic level.

Source: SentimentTrader

             Figure 3: Currency tends to hit the bottom after QE is launched according to the past market response. It is normal that market is a discounting machine  reflecting expectation before the news.

Source: Nordea Market and Macrobond

            Figure 4: EM-US 2 year yield spread is tightening. Euro is like to rise to eliminate the divergence.

Source: Nordea Market and Macrobond

            

            Figure 5: When the downtrend is formed and reaches the pessimistic level, all good news is often overlooked by the crowd. There are some indicators to reveal Europe economy had hit the bottom recently. M1 leading Europe PMI is rising in the past several months.

Source: Nordea Market and Macrobond

               Figure 6: Demand for Credit and Loans pick up in the ECB Bank Lending Survey. Europe is likely to escape from deflation spiral.

Source: Danske Bank

                 Figure 7: Europe tends to ease their loan standard to enterprise according to the ECB Bank Lending Survey.

Source: Danske Bank

                 Figure 8: Private credit leading GDP growth also is on the uptrend.

Source: Danske Bank

   

                 Figure 9: Various business sentiment indicators are improving since 2014.

Source: Danske Bank

                  Figure 10: On the other hand, US economy is time to take breather. ECRI Leading Index had fallen below negative territory.

Source: Dshort

                  To conclude, Euro rebound is coming soon when almost all bearish factors is discounted. I will take a counter trend attack if my highly sensitive indicators give the signals to long. Of course, stop loss with position is a must to control the risk. However, above analysis still cannot change my view that Euro cyclical bear market (or USD bull market) still is on the way. It only is a short term trade to catch the correction with market extremely sentiment.