We had quite the week last week, and this week is shaping to be just as eventful in terms of economics and monetary policy.
First, on the economic front.
US data prints keep coming in disappointing. Canadian data also show now a 2 month contraction in economics growth.
The recession word is being thrown out there, and there is a battle between mainstream financial media, who do not really think a recession is coming, to bigger institutions such as the IMF and World Bank, downgrading growth for this year. Shipping giant Onassis has also spoken about weaker growth.
My analysis for this year seems to be coming true. We are now in a situation where central banks here in the west has probably already ended their rate normalization cycle. Australia has already been talking about CUTTING rates, Capital Markets are expecting Canada to cut rates by the end of this year, and many analysts have already spoken about the US Fed not hiking rates this year…while some contrarians are saying they will in fact cut rates.
Again, this is all due to the fact that debts and deficits are exploding. We are stuck in a low interest rate environment. The Federal Reserve went from a mandate initially of being the lender of last resort, to managing inflation and maximizing employment…to now ensuring asset prices do not go down. This is their mandate in today’s world.
When central banks reverse policy, this is when we can see the beginning of the crisis in confidence. Will people start believing banks, media and governments when they were told how great everything is, to then having the whole narrative shift to the opposite end in a matter of months. Technically, they can use an event for an excuse such as Trump’s trader wars etc. However, when you look at it in terms of monetary policy…you see that central banks are stuck and are now implementing new policies that have never been tried or tested before.
To the geopolitical front.
First let us begin with North Korea and US talks. This is all about China. The US knows that if they want to hurt the Chinese, they cannot really do it through economic means. The Chinese can by selling off debt to spike western interest rates which would be met by western government buying that debt either by printing money, or by increasing taxes to maintain current government spending and to buy this debt.
The way the Americans can damage China is by taking away her shipping lanes. This is what the islands China is creating are for, to protect Chinese shipping lanes down to the Malacca strait.
North Korea provides a good card for the US to be able to encroach on the Chinese sphere and place her ships in Chinese shipping lanes. A deal or no deal suits the Americans. Why?
- Deal is not made, we tried our best, diplomacy is not an option now.
- Deal was made, the North Koreans broke it, we have no other option now.
It is all about two things for foreign policy actions: national interest and a moral purpose, and you can get both with the current US options.
India and Pakistan also had some skirmishes over the border where Indian fighters attacked a base where they believe terrorists are trained, and the Pakistani’s retaliated by shooting down an Indian jet. The downed pilot has been released and is back in India.
India has a currency problem. The rupee is the lowest it has been against the US Dollar. India imports oil daily using the petro dollar, meaning they are taking even a larger deficit due to the weak rupee. This is why India wants a pipeline to Iran so they can purchase oil using Euro’s or other currencies (this pipeline will go through Pakistan and will benefit both nations).
As we see debts and deficits explode, we will see these kind of things as governments try to protect themselves and will blame foreign powers for their incompetence and economic problems. Again, this all occurs as the US dollar gets stronger. Interestingly enough, President Trump said the US dollar is too strong just this weekend.
Turkey is the nation to watch with more caution.
India also has an election cycle so Modi, who is dealing with all this economic problems at home, now looks like the strong man, and is instigating nationalism. To the point aforementioned, governments are trying to protect themselves.
Here in Canada, we are seeing the SNC-Lavalin scandal against our Prime Minister, Justin Trudeau, taking an interesting turn. The previous attorney-general gave a testimony and stated she was basically threatened by the PM and also some bribery was hinted at. Talks are intensifying for the PM to step down…but this is Canada. I do not think the Canadian people really care too much about this which is a sad state of affairs.
This week, we have a lot of interest rate decisions. I am expecting a more dovish tone and talks of a slow down.
- Tuesday: RBA rate decision, US ISM non-manufacturing PMI.
- Wednesday: BoC rate decision, Aussie Q4 GDP.
- Thursday: ECB rate decision, Eurozone Q4 GDP.
- Friday: US non-farm payroll, Cad employment.
The US S&P 500 is approaching a crucial resistance zone. Price tried to break above three times in the recent past and has failed all three times. We are seeing price beginning to stall and range at this zone. If we break above, we can see a potential run to previous highs, eventually breaking into new highs.
For the short, I am waiting for a break and close below the higher low level at the 2760 zone. Watch this chart. We are at a very interesting level that will have great implications for the future.
The UK FTSE indice is also showing a topping pattern. We did break below a support level last week, and bounced off the support zone at 7070. I am expecting a head and should like pattern which just requires the right shoulder forming.
US Oil continuing its uptrend (or pullback some would say) with the higher lows and higher highs. The analysis is the same for these continuations. If we see a break higher, we have formed a new higher low and expect a move higher. If we do break the support at the 55.00 zone, we can easily see this uptrend reverse. We will wait and see.
Copper is probably my favourite chart for this week. We have seen the beginning of the break but this happened on Friday which is not the best time to take a trade to hold over the weekend. Will be interesting to see how the Dollar reacts to President Trump saying the US Dollar is too strong. However, copper is the economic metal (Dr. Copper) and indicates perhaps a slowdown is coming. Nice chart.
GBPUSD is showing the beginning of a potential move lower. The retest of the break was met with sellers and can be seen with the large wick.1.31 or 1.30 are some targets.
EURGBP showing a reversal as well. Sort of a cup and handle pattern which has now created a higher high and we have our higher low to work with. I would wait for a another break higher as it looks like we will be retesting the break as support.
EURCAD had a strong reversal candle on Friday. On the daily, this reversal has broken above previous lower highs and now we expect an uptrend. We will await a higher low to be confirmed which may see a retest of what is now support at the 1.5050 zone.
GBPAUD on the 2 hour chart. It is showing a slowdown in the uptrend, and have now created a double top. Price is struggling to create a new higher high. Will wait for a close below the 1.8575 zone.
Another very nice looking chart. CADCHF on the 4 hour chart showing a classic uptrend, and then range, displaying 2/3 market waves. The next would be the downtrend. We have our break but it was on a Friday. Let’s see the next few candles when the market opens.