On Friday, we like to review the week's activity, and look ahead to what might be factors to influence some of the currency pairs going forward. Since there is a whole world of inputs that may influence these markets, it is impossible to anticipate all of them. In this broad approach to the markets, we prefer to look at the weekly charts to detect the trend. Hopefully, this gives traders some ideas. From here, traders can use entry levels to enter trades. There are no guarantees, so remember to use proper money management.
Looking back at last Friday's article, "Euro Soars as Economic Conditions Sour in Italy and Spain", we sensed that the euro bulls were getting carried away. It was unfortunate that our disdain for initiating a trade on Friday held us back from fading the rally, for that would have been a profitable trade. Sometimes even a small position should be taken when you sense markets seem irrational. That, of course, is the appeal of forex, as traders can select any size position they are comfortable with.
By Monday, the political uncertainty in Spain and Italy became a major concern, and the bonds yields went up. This set the tone for the week. The bulls were able to overcome the negative news and defend their positions during mid-week around 1.35, but on Thursday, ECB President Draghi did them in. He acknowledged the economy of Europe would suffer because of the elevated value of the euro. The banking crises may have been solved, at least temporarily, but the economy is ailing.
On this coming Thursday, we get GDP numbers from Germany and a combined Europe number. It is anticipated the quarterly number will be -0.5 for Germany, and -0.7 for all EU. We should note there is also a G 20 meeting that day.
The political uncertainty that spooked the market this week is still with us. In Italy, Berlusconi is gaining in the polls, and it is estimated he has 28% of the vote, up another 2%. Remember the EU and ECB were responsible for shoving him out the door and installing the unelected Monti as the prime minister. Will there not be some acrimony from the EU should Berlusconi become reelected?
In Spain, too, the problems remain. The controversy over whether Prime Minister Rajoy took slush fund kick backs is a negative diversion, but the real issue is the decimation of the Spanish economy, in part because of the austerity mandates of the EU. Until there is Spanish economic recovery and the unemployment rate come down, the political turmoil will continue.
The weekly charts clearly show a reversal against both the USD and the GBP. It seems to us that the euro's bull run was even more pronounced against the pound. We wish to study this further next week, and may consider selling the euro against the pound rather than the USD. (FXE, EURUSD, FXB)
The weekly chart for the Japanese yen is unique. How often do you see a 14 week or any RSI time period of 86? The yen move has been spectacular, and no doubt fattened the accounts of many traders. The added equity may be behind the January increase in the volume of currency trading.
Perhaps the yen is going to drop to 100 or 120 as some advisers claim, but does that mean the move is going to happen without a correction? So far, the verbal efforts to debased the yen by Shinzo Abe have been quite successful. In fact, the Finance Minister Taro Aso said Friday that the yen had weakened more than intended when it went from around 78 to over 90.
The weaker yen is helping the bottom line of many Japanese companies, but that does not mean the myriad of Japanese problems have vanished. Today it was announced the Japanese current account surplus was the smallest since 1985.
It seems certain the conservative bankers at the Bank of Japan will be replaced, and the yen printing will commence. Ultimately, this will create a massive problem. Currently, the Japanese 10-year note yields .77% per annum, and there are billions of Japanese saver funds invested in these sovereign notes. The Japanese Government Investment Pension Fund (GIPF) is the largest in the world with $1.2T in savings, mostly invested in Japanese bonds.
In April, the GPIF Chairman Mitani will review the portfolio's allocations. Fearful that Abe's plan will run up the bond yields and send the note values lower, Mitani better not tell anyone he is about to reallocate some billions to buy Australian or U.S. notes, because that would make markets quiver.
There are confounding economic problems in Japan, reasons why the yen should weaken, but rarely does a market do this all at once. A rally after the yen hit a low of over 94 yen to the USD is overdue. Is the market due for a return to 90, or 88? We do not know. We will see how the news breaks next week. The market is loaded with shorts, and may be quite responsive to the musings of government officials.