Latest FX market analysis and trade views: 2017-AUG-30 FX market update

Please note, that this article comes from my archive. Check the actual date in the header.

Every normal human being had childhood. Most of normal parents have some scarecrow to have an influence for their kids. Children grow up, but fear remains. It transforms in some other aspects, but it remains one of the most powerful emotions for human being. It is very easy to influence financial markets using such a strong instrument like fear. If you looked at the latest history of Super Country like USA, you would find a big scarecrow sitting in the dark corner. Communists, Usama Bin Laden and terrorists, Saddam Hussein, ISIS, North Korean nuclear dictator, etc. And the Super Leaders of Super Country use these scarecrows from time to time.

I did not have any intention to write something about that missile launched over Japan yesterday night. But I’m forced because of the market over reaction and lots of questions from our readers and clients. We do not take in a serious count a threat of the war. There is no military solution for this story. Once allied forces try to make any invasion to Korean peninsula, there would be a serious threat for Seul and Tokyo. It’s not my opinion, all of the military analysts say the same. Moreover, some of observers have expressed an interesting point yesterday. Why they did not shoot down that missile launched over Japan yesterday? Military defensive power of Japan have such a possibility, so why they did not even try?? The answer is very simple. They knew about this missile, they knew even exact time and direction of that launch and they wanted to have the impact it made to the worldwide press. I even started to think that someone pays big money to that dictator to control his missile activity.

It’s second time in a month with the same story and the same reaction from the financial markets. Initial and solid flight to safety turnes nothing at the end of the day. Yen and gold surge and reverse. Even EURUSD had same behaviour yesterday, soaring 100 pips up and climbing 100 pips back. Equity futures indicate a sell-off up to Wall Street opening, buyers step in and they turn into green at the end of the day. By the way, we heard about lots of talks about risk aversion and jump to safety yesterday. But tell me please, what is a flight to safety with EURJPY going up and USDZAR falling like a rock?? It was more dollar-aversion, I would say.

Does someone use this scarecrow to knock out traders and investors off the market? Do they want to create a wild demand for treasuries and bonds? We will never have answers. The only thing we can do is to minimize emotional impact. If you came to Forex market, you should be ready for such crazy volatility. We need to analyze the situation with a bigger picture.

First of all, it was not a big surprise for us to see strong EURUSD. You can find from our previous outlooks, that we have been bullish on EUR from 1.1680 despite overbought technical indicators and some divergences.

Secondly, we are heading to crucial timing for all of the financial markets. There is a sign, that direction of US Labour Day determines direction for the whole fall. So it’s very important to see how the prices will go through closing of this week together with opening through the long weekend in US.

Third, technical analysis says that a level has been breached after clear and sustainable close (daily) prices above that level. Can you show me daily close EURUSD prices above 1.2000? Not yet. Just a shadow on a daily candle.

So it’s time to take profits of longs and wait-and-see what is going to happen next. We might see a big fight for 1.2000. There are several possible scenarios for the nearest future, let’s try to look at the charts. Here is the daily EURUSD chart:

Prices are at the very upper range of Bollinger Band and far away from average levels of SMA89. Slow MACD turns bullish after sideway consolidation in the range of 1.1680 - 1.1854. Fast RSI signals preliminary signs of reversal or retracement at least, coming out of overbought levels. Mixed picture adding uncertainty...

If you switched to the weekly timeframe with the same chart settings, you will find MACD much more bullish with extremely overbought RSI and same upper range of BB.

Most probable scenario in this technical picture is a sideway consolidation before further uptrend. Oscillators need to be reloaded and eased off overbought levels before moving forward. Some of analysts started to shout that it’s time to short EURUSD. We would stay away of such risky steps, taking in count the fundamental and political divergence.

Next big fundamental event is US NFP report this Friday with average expectations around 180K. Traders will watch closely ECB meeting next week. That would be main event to understand further behaviour of EURUSD. We keep in mind that one of the drivers for its’ uptrend was speculation about hawkish ECB steps.

Asian continent is full of big money. Second (China) and third (Japan) biggest economies, export oriented is full of reach and strategic thinking investors. They always fight for lower local currencies to compete overseas. They direct a huge flow of speculative and real money to the regions they have most export. It feels like new US President and his team are trying to use the same weapon against them in the geopolitical competition. But they fight. You may see how tough is the fight for strategic technical support of USDJPY around 108.85. Here is the weekly chart:

Four attempts to break it in August failed. Eight attempts since April 2017 in total. Every time they try to get through this support and close week below it, they face a strong buying flow. Exactly as we’ve seen it yesterday. USDJPY had 5 hours of shadows and tales before reversing and soaring above 109 yen per dollar. It’s almost 110 now as I write these lines. One of the biggest supportive factor for USDJPY is the uptrend in US equities. As a risk appetite asset, USDJPY correlates with stock indices.

As investors are heading to the new season, we could observe a continuation of asian money flow. Maybe we could see some shift from US assets to European region in case of sustainable fundamental reports. One of the reasons of such shift is political concerns in US. Debt ceiling, election investigations and permanent conflicts inside Trump’s administration do not add confidence to investors. This is why we observe such a sustainable uptrend in EURJPY. We suggest, it could go further during this fall.

We’re not surprised also about GOLD soaring yesterday. Those who have read our update this Sunday can confirm these words. The only thing we did not take in count is the speed of this surge in GOLD prices. It makes us doubting about a sustainability of this movement yesterday. Anyway, profits have been taken and we’re relaxed having wait-and-see tactics. It would not be a good idea to buy at the top of the market. So people who missed this upside surge should wait for a next chance to join the party.

There is an interesting picture in USDCAD. We’re definitely bearish on this pair in a mid-term perspective. We think that USDCAD would continue its way to lower 1.20 figures. Fundamental analysis confirm this suggestions with RBC much more hawkish than FOMC. But there is a temporary support for USDCAD which came from the weather. Harvey’s estimate losses are around $100B. Many refineries remain shut down easing the demand for Crude Oil. This caused easing in prices for Crude and growing gap between it and Brent. Moreover, gasoline prices soar, enlarging the gap between gasoline and Crude Oil. Of course, this story will calm down together with the tropic hurricane and Crude Oil prices will come back to normal trading. Once this support for USDCAD will be eliminated, the pair will continue heading downside. So we keep monitoring weather forecasts and we keep eyes on Canadian GDP on Thursday together with US jobs report on Friday. Our target is to renew shorts of the pair. Most aggressive traders can try their luck selling highs around 1.2538..55. But would expect better levels around 1.2600. Here is a squeezed H4 chart: