Just when we thought the markets calmed down after all the volatility last week, China and Europe caught us by surprise by dropping some mean beats on the forex dance floor.
People’s Bank of China (PBoC) cut interest rates, and Super Mario (AKA Mario Draghi) from ECB spoke about his aims to raise inflation “without delay”.
China’s Rate Cut & Worries
Turns out China isn’t that happy about the ‘new normal’ in their economy they talked about in the Asia-Pacific Economic Cooperation summit last week after all! PBoC policymakers finally admitted that the world’s second largest economy badly needed stimulus
The reduction of the benchmark lending rate and the overnight deposit rate by the PBoC was their first rate move in more than two years and, though markets bought heavily on the back of it, there should be a strong undertone of caution that they’ve made the move.
China’s headline economic growth rate is 7.3%, which is a fabrication by Beijing, but China’s fear seem to be more powerful:
1- Fear of Credit Cycle Problems
They fear that if, by their measures, that falls below 7% there could be serious problems in the credit cycle, with companies going bust, defaulting on their obligations (i.e. Loans which were generously handed out in 2008 to help companies overcome the global financial crisis at the time) and leaving a lot of people unemployed in the process.
2- Fear of Falling Inflation
The other problem they are facing, much like the rest of the world, is falling inflation. And, much like the rest of the world, China has a lot to lose if their economy flirts with deflation, which would further exacerbate the problems above. With that in mind, a number of analysts are skeptical that the rate cut will be enough to increase money flows and stimulate growth and as such are already suggesting that China will need to go much further in the coming months. Whether or not Beijing has the will power to do so will remain to be seen, but at least Friday’s move was a step in the right direction.
ECB Governor Stimulus Talks
Before China cut rates on Friday, the head of the European Central Bank (ECB) Mario Draghi was speaking about his fears that even though his actions to date are having some impact in the financial sphere, they aren’t fully transferring to the economic sphere, which is where the bunch of the problems rest. Markets took note of him saying that if “further risks to the inflation outlook materialize, we would step up the pressure and broaden even more the channels through which we intervene” and now believe that QE is very likely in the first quarter of next year. His words were further fuel to the equity buying fire, which saw Spain, Germany and France all close higher by more than 2.5%.
How Markets Reacted
Global equities rallied heavily on Friday as China sneaked in and cut interest rates. US stock markets failed to capitalize on China’s curve ball, with initial market enthusiasm worn down throughout the final session of the week. This didn’t stop both the S&P and Dow Jones closing at record highs for the fifth week in a row, having not looked back since recovering from mid-October’s price correction.
Friday’s news gave brief reprieve to the sliding oil market, with both Brent and WTI prices up on the day. Fears remain over what could happen if prices continue their downward slide towards $60 per barrel though. Energy production is typically a cash flow driven business and the fall in prices for business that are modeled on $90 oil could mean defaults on debt, particularly in the US where the shale boom has been heavily leveraged to get production on-line. Opec released a report at the weekend that shows US oil imports at a near 30 year low as the country has worked hard to move toward self sufficiency.
What’s up This Week
It’s Thanks Giving week here in the US so we could expect slower dance moves for Ms. USA. We’re likely to see volumes start the week slightly lower and tail off as the days pass by. That’s not to say there isn’t plenty of data to get through though. The biggest numbers are going to be the second readings of Q3 GDP from the US, the UK and some European countries. The second reading casts a little more light on exactly where in the economy the growth came from and as such will be closely scrutinized.
Overnight tonight we get to read the Bank of Japan’s last meeting minutes, which should provide some further details on their recent decisions to put even more chips on the QE table. It has been a Labor day holiday in Japan today, so markets have been closed and as such haven’t yet reacted to the news from China. That’s why we could be in for a big move this evening, in typical Japanese equity market style.
Today’s European and US calendars make for pretty light reading, but Friday’s stock market moves might lead to some profit taking or repositioning, so there’s every possibility of a busy day.
Intraday Forex Technical Levels
EUR/USD 4-hour: Rebounding.
Invest Diva positioning: Long positions above1.2363 with targets at 1.2487 and 1.2563 .
Technical reasons why: The pair was unable to break below the key support level at 1.2363 and is rebounding. Since it remains below the Ichimoku’s cloud, we could expect more down-moves in a long run after this temporary rebound. . The RSI is heading up below the neutrality area.
Alternative Scenario: Below 1.2363 look for further upside towards26241.2299 and 1.2241 in extension.
Where I’m setting my stops and limits:
Support Levels Turning Point Resistance Levels
| Support Levels | Turning Point | Resistance Levels |
|---|---|---|
| 1.2299 | 1.2487 | 1.2624 |
| 1.2241 | 1.2363 | 1.2563 |
NZD/USD 4-hour: Consolidating below the Ichimoku’s cloud.
Invest Diva positioning: Short positions below 0.7936 with targets at 0.7659 and 0.7461 in extension.
Technical reasons why: The pair failed to broke above the 23% Fibonacci level and Ichimoku’s cloud. The RSI is around the neutrality area.
Alternative Scenario: Above 0.7936 look for further upside towards 0.8108 and 0.8247.
Where I’m setting my stops and limits:
Support Levels Turning Point Resistance Levels
| Support Levels | Turning Point | Resistance Levels |
|---|---|---|
| 0.7659 | 0.7936 | 0.8247 |
| 0.7461 | 0.8108 |
USD/CAD 4-hour: Rebounding from the 61% Fibonacci level.
Invest Diva positioning: Long positions above 1.1226 with targets at 1.1272 and 1.1317 in extension.
Technical reasons why: The pair reached and is now rebounding from our bearish target and support level at 61% Fibonacci at 1.1226. The RSI is heading up to the neutrality area.
Alternative Scenario: Below 1.1226 look for further downside towards 1.1171 and 1.1080.
Where I’m setting my stops and limits:
Support Levels Turning Point Resistance Levels
| Support Levels | Turning Point | Resistance Levels |
|---|---|---|
| 1.1171 | 1.1226 | 1.1317 |
| 1.1080 | 1.1272 |
USD/JPY 4-hour: Consolidating.
Invest Diva positioning: Long positions above 117.50 with targets at 118.86 and 119.78 in extension.
Technical reasons why: The pair continues to move up above the Ichimoku’s cloud. The RSI is moving above the neutrality area.
Alternative Scenario: Below 117.50 look for further downside towards 116.56 and 115.60.
Where I’m setting my stops and limits:
Support Levels Turning Point Resistance Levels
| Support Levels | Turning Point | Resistance Levels |
|---|---|---|
| 116.56 | 117.50 | 119.78 |
| 115.60 | 118.86 |
GBP/USD 4-hour: Consolidating.
Invest Diva positioning: Short positions below 1.5731 with targets at 1.5591 and 1.5481 in extension.
Technical reasons why: The pair keeps moving sideways at the range between the previous bottom and 23% Fibonacci level as entering the Ichimoku’s cloud. The RSI is also around the neutrality area.
Alternative Scenario: Above 1.5731 look for further upside towards 1.5817 and 1.5887.
Where I’m setting my stops and limits:
Support Levels Turning Point Resistance Levels
| Support Levels | Turning Point | Resistance Levels |
|---|---|---|
| 1.5591 | 1.5731 | 1.5887 |
| 1.5481 | 1.5887 |
USD/CHF 4-hour: Going down.
Invest Diva positioning: Short positions below 0.9648 with targets at 0.9592 and 0.9548 in extension.
Technical reasons why: The pair failed to break above the previous top and pulled back, approaching the Ichimoku’s cloud. The RSI is heading down to the neutrality area.
Alternative Scenario: Above 0.9648 look for further upside towards 0.9737 and 0.9815.
Where I’m setting my stops and limits:
Support Levels Turning Point Resistance Levels
| Support Levels | Turning Point | Resistance Levels |
|---|---|---|
| 0.9592 | 0.9648 | 0.9737 |
| 0.9548 | 0.9815 |
