At the beginning of the year, I discussed how central banks will be changing their policy stance around March. We have seen that. Western central banks are going dovish. I followed this up by saying that the next move in interest rates will be to CUT rather than hike. This is also happening…sooner than I have expected.
The Royal Bank of New Zealand has been the first to say that they will likely cut rates soon. The Bank of Canada is talking about rate cuts being warranted. In the US, we have heard Larry Kudlow and President Trump speak about cutting interest rates.
Last week, I said that I expect this market is pricing in rate cuts. My uber contrarian call is that I believe we may see this rate cut occur as soon as this month (April 2019). If we do not get this, the market may fall. Again, for President Trump, it is all about higher stock markets so he can tweet “strongest economy ever”. His 2020 re-election campaign will go from Making America Great to Keeping America Great. He needs high stock markets.
I have spoken about Treasury secretary Steve Mnuchin speaking to the 6 large banks in the US in December 2018. I am sure he told them to keep this market up (buy) and if there is a problem where you lose (a large short sell order takes them out) the government will bail you out.
President Trump just this week spoke about how the Federal Reserve should go back to Quantitative Easing…just to define QE to my readers, QE is when the central bank prints money to buy debt (bonds) to add money to the economy as a stimulus. In many other countries (Japan, and in Europe), central banks have taken this to a whole new level by buying assets such as stocks etc…the Federal Reserve could be too, but they will not allow any type of audit.
Currently, the narrative is that these central bank policies of QE have worked and we have recovered from the 2008 recession. We are doing Quantitative Tightening, where the central bank sells off their balance sheet (debt) and also hikes interest rates since cheap money is not needed due to the recovery. Just an aside, even with QT, the US Federal Reserve balance sheet is larger than most countries GDP. Again, the Americans can do this due to the US Dollar being the world reserve currency. US Dollar demand in the world is high, so the Americans printing dollars is warranted as long as this demand remains and increases (as I think it will, people will run into the US Dollar). This all will come to be a major issue when the Chinese and Russian decide to de-dollarize, which is already beginning, AND when the US Dollar gets stronger (which I have said, causes all the problems in the world to get worse) as third world countries and emerging markets find it more expensive to pay off US Dollar denominated debt and import Oil using US Dollars as their local currencies have depreciated (seeing this happen in Turkey and India already).
What should make the people of the world question this call for QE is the fact that President Trump (and financial media) have been speaking about how the US economy is the strongest it has ever been…so strong in fact that we need to go back to QE (financial heroin) and start cutting interest rates…Sorry President Trump, but you cannot have it both ways.
So why is this coming out? Again, it is all about keeping stock markets propped up. This is what President Trump has, and needs this to win re-election. The Democrats are in shambles, but the only way they can really win is if we have some sort of economic crisis or recession where the Democratic socialist side resonates with many people.
China plays a huge role too. I have spoken about how China holds all the cards. The Americans really have one advantage: their military (for the next 2 years until China catches us…maybe less, read my China Thucydides Trap post).
The Chinese can remain patient with this trade war. They know President Trump’s achilles heel are the US stock markets. If they begin to fall, President Trump will be forced to the table and then the Chinese can dictate the terms. The Americans have been hoping the Chinese economy would do poorly, and the people would take the streets forcing the Chinese to the table…but China has authoritarian measures…they will not allow dissenting voices or opinions (even alternative) to be heard.
Recently, some tidbits about the US-China potential deal have been leaked. It seems that no deal will really be made, but the US will give China until 2025 to see if the Chinese will actually begin buying more American goods.
To me, this is just a way for the Americans to save face and NOT admit defeat. They know the Chinese hold the cards. If this news came out I believe stock markets would not take it too nicely. It would be stock market negative. President Trump mentioning QE is a sign to market participants saying that look, interest rates will be cut, and QE will occur again…the Fed will do everything they can to keep these markets propped…we have your backs, so ignore this China story now (which many believe is what the global markets are waiting for).
I have stated many times about the other social issues on why assets need to keep moving up (taxes, pensions, retirements etc) so it is all about maintaining confidence in the system. I state this many times, but a confidence crisis is looming. We will cut rates, and go back to QE…people will then begin to question central bank policies and if they actually work. Furthermore, things will keep getting more expensive, inequality will rise and social issues will get stretched to their limits. Japan is the best case scenario…but it would take a big fall in assets before we can do this in my opinion.
For this week, the biggest event will be the Brexit deadline on April 12th. A deal needs to be reached to avoid a hard Brexit. I have explained many times on why I think Brexit will not happen on my blog posts to the point where many of you are probably sick of it. But again, there are reasons why the British and European elites do not want Britian to leave but also the fact this this will be STOCK MARKET NEGATIVE. We cannot have that happen. I would not be surprised if another Brexit re-vote occurs. This would be the 5th case of Democratic votes being ignored/overturned in Europe. It is not about the people, it really is about what the elites want.
- Wednesday: Kuroda Speech, ECB Interest Rate Decision, US CPI ex food+energy (March), US FOMC Minutes, European Council Summit on Brexit.
- Thursday: Chinese CPI (March).
- Friday: Brexit Deadline.
In regards to this weeks chart set-ups, I want to remind people of the British Pound risk. There will be some Pound pairs, but I want to stress, I will likely not take them due to the event risk. Many traders like volatility, but honestly, you should be trying to avoid that. We are looking for high probability set ups, and volatility just decreases our probabilities of success.
No set up really for the US markets that meet my trade criteria for this week, but I need to say that everything points to markets going higher. We will be testing the previous all time highs, and may even break into new all time highs (follow President Trumps tweet to let you know when this happens). If I were to see a reversal, I would like to see the previous higher low be taken out OR when we reach previous all time highs, see some sort of reversal pattern come in around that resistance zone.
A simple breakout play on the Japanese Nikkei index. We had the break, I would like to see the follow through to judge the strength.
Two plays for Gold this week. First on the Daily chart, we have had a nice uptrend, which has now been broken due to the close below the higher low. We are now making what could be our first lower high (need a lower low to confirm this) and to add more to this confluence, a break and close below the 1280 zone gives us a break of a head and shoulders pattern, my favourite reversal pattern.
On the 4 hour, a different set up. We have had a nice downtrend with multiple waves recently, now we are stalling at this support zone of 1280. The bulls and bears are battling it out here. If we see a break of the swing (lower high) on the 4 hour chart, above the 1290-1295 zone, we could start an uptrend on the 4 hour chart. I do like the bottoming pattern setting up, but again, this is why we await for candle closes.
Silver is showing the same sort of reasoning to Gold on the 4 hour (there is even a daily break lower setup but does not look as good as Gold, but they usually move in tandem). For Silver it is simple, I am waiting for a break of the 15.20 zone.
I think everyone has EURUSD on their radar. At a support zone, we have had a nice downtrend, and could be creating a potential head and shoulders pattern here. Wait for the break and close over the 1.1250 zone.
Not really a trade I would take, but NZDUSD shows some interesting technical breaks. Created a triple top, where we attempted to break out of a resistance zone, and we have now broken below a higher low and seem to be initiating a downtrend. Again something I would not really trade, just because I do not have a well defined trend, but this is a pair lots of traders will be watching.
Very easily my favourite looking set up for this week ahead. CADJPY on the 2 hour, and even on the 4 hour, meet many of my criteria. Nice uptrend, and now we are weakening, showing a typical reversal pattern, the head and shoulders. Waiting for a break of the 83.34 zone. Be wary of that long wick, I would like to see a nice red bodied candle break before entering.
CHFJPY is also on my radar. Nice uptrend, and it appears we are losing that upwards momentum. Will await for a break of 111.50 to enter.
EURNZD is one that interest me greatly. The trend is not the most ideal, but it is apparent. We have also broken above the previous swing (lower high) meaning we have invalidated the downtrend. One thing to not is the break at 1.6380, and then the subsequent engulfing candle reversal. Just reading this tells us that the bulls still have life and now breaking above the lower high swing gives more momentum.
I spoke about GBPAUD last week, and unfortunately, the break reversed and stopped me out. There is a possibility of a new entry when we create lower lows, but I want to stress that price action will be volatile due to the Brexit situation. Be careful.
GBPNZD looks good on the 2 hour chart. Nice uptrend with multiple waves (minimum is two), and strength is beginning to top. I want to see a break of 1.9330 zone for an entry. Again, it is a Pound pair so be careful.
Finishing off with CADCHF. Nice uptrend with multiple waves, we are seeing the strength begin to fade off. I will wait for a break of the 0.7460 zone and assess from there. There is a big zone at the 0.7440 area so this trade would not be the most ideal, however this is why we assess once we see candle closes.