Draghi On The Tightrope
The ECB is scheduled to meet on Thursday, however it’s only an internal meeting and no new economic staff projections (ESPs) are expected. Bond investors in particular are looking for Draghi’s press conference for clues as to what interest rate policy to expect for the third and fourth quarters of this year. But given that the EUR/USD is now heading toward 1.15 I have an inkling that Mr. Draghi will choose his words very cautiously as he is now walking a precarious economic tightrope.
Over the past few weeks the ECB has been uncharacteristically quiet while the Federal Reserve pointed towards waning inflation and lackluster consumer confidence hinting that this may have been it in terms of interest rate hikes throughout 2017. Not surprisingly the Dollar has now dropped to its lowest levels since September 2016 while the Euro is reaching escape velocity, closing last Friday at 1.1450. However, the ECB’s technical assumption for the EUR/USD in 2017 stands at 1.080. And a few more weeks of Euro bullishness could blow many of the ECB’s economic assumptions right out of the window.
Technically speaking the EUR/USD is now breaching an inflection point which, moving forward, could make life difficult for the ECB. Due to almost a year of sideways churn the 100-week Bollinger has been squeezed to the max while the monthly panel shows us a pretty well defined sideways pennant. IF the EUR/USD manages to pump its way beyond 1.16 then a veritable feeding frenzy could be triggered and we may see it near 1.25 by the end of the summer. This may sound like a gross exaggeration given that it traded near 1.03 six months ago but during my trading career I personally have seen currencies mercilessly squeeze the shorts (and the longs) on many occasions.
Of course the Euro long trade has been getting a bit crowded lately. According to the CFTC’s latest COT report, there were 83.8K net-long contracts held by speculators in the futures market for the week ended July 11, the highest level since the week ended May 3, 2011. So quite a few participants are probably expecting that the current advance has run its course and are awaiting ‘new instructions’ so to say. Thus should Mr. Draghi utter anything even remotely resembling a hawkish comment this Thursday then I suggest that you strap on your helmets and grab on to something because it would trigger massive moves across forex and of course equities, commodities, and bonds.
With the Dollar falling and week #28 seasonally being the most bullish until Q4 it’s no surprise that pretty much everything across the board has been on the rise. This week (#29) is usually blessed with a bit more follow through, thus I would not expect much pull back at least until this Thursday. Let’s look at a few key markets:
Copper is gaining strength again and may be touching its own bullish inflection point this week or the next. Note the tightly compressed weekly BBs which are now starting to point up and of course the monthly panel is looking increasingly bullish. If copper can make it to its upper 100-week Bollinger then I would be on the look out for a small pull back, after which of course a long position is on the menu.
Even crude has been finding a bit lately and the daily panel now shows it attacking its current Net-Line Buy Level (NLBL). This is a bit too early for me personally however and I’ll be holding off until I see a small correction which does not breach the previous spike low.
Corn is a setup I’m willing to get behind but only with a very small position size (e.g. ~0.25%). The previous sell off has been NASTY and I’ve got no problem with a little lottery ticket now that it looks like we may have a short term spike low in place. But again, if the Dollar suddenly gains strength then corn could drop even lower. Thus for now let’s deploy only some petty cash and see what happens here today.
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